AMBUJA CEMENTS LIMITED RESEARCH EQUITY RESEARCH
June 20, 2008
RESULTS REVIEW
Ambuja Cements Limited
Share Data
Feeling the pinch
Market Cap Price
Rs. 129.4 bn
Ambuja Cements Limited (ACL) could not shield its profits from the rising
Rs. 85
raw material and power costs, which resulted in 868 bps yoy fall in EBITDA
BSE Sensex
14,633.07
Reuters
ABUJ.BO
Bloomberg
ACEM IN
Avg. Volume (52 Week)
1.1 mn
52-Week High/Low
Rs. 160.9/79.8
Shares Outstanding
Sell
1,522.5 mn
margin. However, net sales grew by 17% yoy on the back of higher volumes. We downgrade our rating on the stock from Hold to Sell due to the following reasons: Falling realisation rates likely to reduce top-line growth: On a sequential basis, the average realisation rate registered a decline of 2%. Owing to an expected excess supply scenario and the government’s price
Valuation Ratios (Consolidated) Year to 31 Dec EPS (Rs.) +/- (%)
2008E
2009E
control policies, the realisation rates are expected to dip further.
8.3
9.2
Consequently, we have estimated a CAGR of 5% in the top line for the next
(31.4%)
10.2%
PER (x)
10.2x
9.3x
EV/ tonnes (Rs.)
7,039
6,597
Rising costs pulling down margins: Raw material costs doubled during
EV/ EBITDA (x)
6.7x
6.0x
the quarter, due to an increase in the prices of limestone, fly ash, and coal,
two years.
a trend that is likely to persist due to the global inflationary pressures. Shareholding Pattern (%)
Moreover, the Company is forced to purchase clinker from the market at an
Promoters
48
FIIs
24
Institutions
14
capacity. Going forward, this trend is likely to continue as clinker capacity
Public & Others
14
addition is expected only in the middle of CY09. Considering these factors,
expensive rate as it is increasing its grinding capacity faster than its clinker
we expect that margins would drop significantly in CY08E. However, the
Relative Performance
clinker capacity addition is likely to stem the fall in margins for CY09E. 200 160
.Key Figures (Standalone)
120
Quarterly Data
Q1'07
Q4'07
Q1'08
YoY%
QoQ%
(Figures in Rs. mn, except per share data)
.
40
Net Sales
Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08
80
ACEM
14,195
15,210
16,549
17%
9%
EBITDA
5,659
5,007
5,160
(9%)
3%
Adj. Net Profit
3,887
1,937
3,302
(15%)
70%
EBITDA
39.9%
32.9%
31.2%
(22%)
NPM
27.4%
12.7%
20.0%
(27%)
Rebased BSE Index
Margins(%)
Per Share Data (Rs.) Adj. EPS
2.6
1.3
Please see the end of the report for disclaimer and disclosures.
2.2
(15%)
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70%
AMBUJA CEMENTS LIMITED RESEARCH EQUITY RESEARCH
June 20, 2008 On the basis of DCF analysis and valuation, we conclude that the stock seems to be over valued at the current market price. Hence, we downgrade our rating from Hold to Sell.
Ongoing Expansion Projects Expected Completion
Type of Plant
Location
Capacity
Clinker Expansion Project
Bhatapara
2.2 mtpa
2009
Clinker Expansion Project
Rauri
2009 End 2008
Captive Power Plants
Rariyawas/Maratha
2.2 mtpa 112 MW
Cement Grinding Unit
Gujarat
1.5 mtpa
2009
Cement Grinding Unit
Dadri (UP)
1.5 mtpa
2009
Cement Grinding Unit
Nalagarh (HP)
1.5 mtpa
2010
Cement Grinding Unit
Barh (Bihar)
1.0 mtpa
2010
Source: Company Data, Indiabulls Research
Result Highlights Volumes leading to top line growth Sales volume contributed to the rise in revenue
Net Sales increased by 17% yoy to Rs. 16,549 mn mainly on the back of the improvement in the sales volume, which increased by 11% yoy from 4.3 mt in Q1’07 to 4.8 mt in Q1’08. Moderating realisation rates The average realisation rate registered an increase of 5% yoy; however, sequentially it fell by 2%.
Margins under pressure Sharp rise in raw material cost eroding margins
Despite the top-line growth of 17% yoy, EBITDA declined by 9% yoy to Rs. 5,160 mn as rising raw material and fuel costs had a dampening effect on the margins. Raw material cost per tonne increased by 80% yoy due to a significant increase in the price of limestone and purchase of clinker at an expensive rate from the market. Power and fuel costs per tonne rose by 9% yoy. Nevertheless, with the commissioning of 66 MW captive power plants, the company could offset part of rising coal prices. Employee cost also surged 32% from Rs. 502 mn in Q1’07 to Rs. 660 mn in Q1’08.
Please see the end of the report for disclaimer and disclosures.
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AMBUJA CEMENTS LIMITED RESEARCH EQUITY RESEARCH
June 20, 2008 The adjusted net profit increased 2% owing to increase in other incomes. However, excluding other incomes, the net profit declined marginally by 0.5%. Quarterly Data
Q1'07
Q4'07
Q1'08
Realisation rate (Rs. per tonne)
3,283
3,517
4.3
4.3
Raw materials
244
Power and fuel Freight and forwarding
Sales Volume (mt)
3,448
YoY % 5%
QoQ% (2%)
4.8
11%
11%
257
438
80%
70%
536
679
587
9%
(14%)
642
618
665
4%
8%
Cost Per tonne (Rs.)
Staff Cost
116
123
138
18%
12%
Other Expenditure
436
683
544
25%
(20%)
Total Expenditure
1,974
2,359
2,373
20%
1%
EBITDA
1,309
1,158
1,075
(18%)
(7%)
Source : Company Data, Indiabulls Research
Outlook
Cement consumption growth is expected to remain stable in the medium term due to expanding infrastructure, increase in housing construction activities, and various upcoming power projects. However, according to the Cement Manufacturers Association, the industry is likely to create an additional capacity of 32 million tonnes in FY09E, which may lead to supply excess. This demand-supply mismatch is likely to moderate cement prices Rising operating costs and falling realisations are major concerns
in FY09E. Moreover, the government’s attempt to keep cement prices under check could further strain the average realisation rate.
We believe that the top line of the Company will feel the pinch of falling realisation rates, and accordingly we expect the top line to grow at significantly lower CAGR of 5% (07-09E), in comparison to the historical growth of around 30%.
Simultaneously, the cement–clinker capacity mismatch and rising prices of limestone, fly ash, and coal are likely to put pressure on the margins.
Please see the end of the report for disclaimer and disclosures.
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AMBUJA CEMENTS LIMITED RESEARCH EQUITY RESEARCH
June 20, 2008 Valuation
ACL is trading at a forward P/E of 10.2x and 9.3X for CY08E and CY09E, respectively. On the EV/EBITDA basis, the stock is trading at 6.7x and 6.0x for CY08E and CY09E, respectively.
We have valued the Company using DCF analysis, assuming cost of equity at 13.6% and terminal growth rate of 5%. Our fair value estimate is Rs.67 relative to current market price of Rs. 85. This reflects a downside of 21% and therefore we downgrade our rating from Hold to Sell.
Key Figures (Consolidated) Year to December
FY05
CY06
CY07
CY08E CY09E CAGR (%)
(Figures in Rs. mn, except per share data) Sales Vol (mn tonnes) Net Sales
(CY07-09E)
14.6
16.3
16.9
17.9
19.1
7%
30,647
42,609
57,921
60,096
64,115
5%
EBITDA
8,079
14,220
20,353
18,870
20,902
1%
Net Profit
4,873
10,868
13,230
12,640
13,934
3%
Margins(%) EBITDA
26.4%
33.4%
35.1%
31.4%
32.6%
NPM
15.9%
25.5%
22.8%
21.0%
21.7%
Per Share Data (Rs.) Adj. EPS
3.6
7.2
PER (x)
16.4x
19.7x
12.1 7.0x
Please see the end of the report for disclaimer and disclosures.
8.3
9.2
10.2x
9.3x
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(13%)
AMBUJA CEMENTS LIMITED RESEARCH EQUITY RESEARCH
June 20, 2008
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